Commentary on how China and the world are adapting to each other -- or not.

December 13, 2010

China's Mixed WTO Record

In a decision released today, a World Trade Organization (WTO) panel found that the United States was within its rights last year when it instituted higher tariffs against imported tires from China.

In September 2009 the Obama Administration announced a 3-year graduated tariff against certain tires from China because it found that the rapid increase in tire imports were harming US tire producers. These "special safeguards" seemed strange at the time because the primary American advocates for the tariffs were the labor unions associated with the domestic producers. By contrast, the management of the US tiremakers, some of whom have factories in China, were opposed to the penalties. In 2002, under a different law, the Bush Administration announced a set of safeguard tariffs against steel products from a large number of countries. Within a year or so, the WTO rule those safeguards violated WTO statutes, and the Bush Administration revoked them. This case was different largely because the US action relied on a part of China's accession protocol that specifically empowered China's trading partners to institute such special safeguards when there had been a surge in imports without having to demonstrate that those imports were either cheaper than those sold at home (dumping) or sold cheaply as a result of government aid and protection (subsidies).

Perhaps forshadowing the coming defeat, in August 2009, the US Trade Representative held a hearing on the matter, and the Chinese industry association representative, by all accounts, gave a very poor presentation. She essentially made an economic argument, saying the tariffs were not in America's interest, and she paid little attention to China's accession protocol to the WTO or other statutes. That dichotomy mirrored my own thinking: I thought the US was likely in the legal right, but it wasn't necessarily good American trade policy. American labor organizations have argued that there has been a resurgence in domestic production since the tariffs were instituted, but the US-China Business Council issued a report in August showing that the great majority of new production has been in categories not covered by the special safeguard tariffs.

Pulling back from this case, we can now see that China has a mixed record when playing at the WTO. So far the WTO has handled a little over 400 cases in its 15-year history. The applicants of cases, those who charge its trading partners had unfair trading practices, win in about 90% of the cases in which the WTO issues a verdict.

How does China compare? China has been a respondent (accused of having unfair trade practices) in 11 cases, 7 of which have been completed. According to my count ( Download China WTO Cases), including those cases in which China voluntarily rescinded rules its partners thought unfair (in essence, admitting a violation without the WTO issuing a verdict), China has lost 5 of those cases, won 1, and earned a split decision in another. That would give China's opponents a 78.5% winning rate against China, somewhat below the typical 90% victory rate. Not bad for China and its lawyers.

On the other hand, China isn't doing quite as well as the typical WTO average when it sits on the other side of the table as an applicant. The PRC has now brought 7 cases to the WTO, 6 of which have been concluded. China has won 4 of these cases and lost 2. Although it's not a 90% success rate, it is not that bad. And there is still one outstanding case (EU antidumping duties on Chinese shoes).

The above figures could change since it is likely that three of the recent rulings will be appealed by the losers to the WTO's Appellate Body. China is likely to appeal its losses in the Antidumping-Counterveiling Duties and Special Safeguards cases, and the EU likely will challenge the Fasteners Antidumping case decision.

In terms of their effect on overall Chinese trade policy, China's wins have been as important as their losses. China's first really important victory came in the 2007 IPR penalty case brought by the US. In January 2009, the WTO ruled that China's penalties against IPR thieves were not so low that they essentially condoned IPR theft as a matter of law. And earlier this month, the WTO ruled that EU antidumping tariffs against Chinese fastners (a fancy word for screws and bolts) were applied in an overly broad manner, with one rate being applied across a wide swath of companies without determining the individual companies' actual prices.

On the other side of the ledger, its most significant loss may have occurred in October when the WTO ruled that the United States had acted properly when it simultaneously instituted antidumping and anti-subsidy penalties against the same products. China had charged that the US had engaged in unfair double-counting. Combined with today's decision on special safeguards, it appears the United States and others will continue to have wide latitude to institute fair-trade penalties against China for the next few years. This includes the right to continue to treat China as a non-market economy when determining tariff penalities. Why? Because according to China's WTO accession protocol, the US and others have the right to use special product-specific safeguards for the first 12 years of China's membership in the WTO, that is, until December 10, 2013, and to treat China as a non-market economy for the first 15 years of its membership in the WTO, that is, until December 10, 2016.

From one perspective, although China accepted these provisions as part of its accession package, my own sense is that these provisions are particularly unfair to China, what some call WTO-plus requirements. They require China to live up to standards few other WTO members face. The expert on these elements of China's WTO membership is Julia Qin of Wayne State University. Non-market economy status is particularly unfair. Antidumping rules on their own are already discriminatory and in need of reform because they allow tariffs to be implemented on the flimsiest of evidence. Not having to use data from China to determine home-market prices and instead being able to use data from a third country (usually India, Poland or Mexico) seems more than egregious and against the spirit of the WTO's goal of promoting greater liberalization. Daniel Ikenson of the CATO Institute has a terrific 2005 paper which reveals the illogic of nonmarket methodology.

However, there may be a "policy" silver lining to the cloud of unfair fair-trade law. The Obama Administration could use these WTO victories to placate protectionists in Congress that it already has the tools to deal with the Chinese. Hence, there would be less of a need for Congress to pass and for the president to sign a bill authorizing the president to institute tariffs against China for manipulating the Renminbi. We can be sure even if passed in its present form, giving the president authority but not requiring him to act, that China will respond with actions that do immediately hurt US industry and that it would file a WTO case which, IMHO, it would stand a very good chance of winning. The US should not be adopting trade policies that one can predict will be overturned by the WTO. Not when the US wants others, including China, to abide by their own WTO commitments. On the other hand, these victories may embolden American policy makers even more, such that they believe they can adopt even tougher policies in search of "re-balancing the economic relationship" between the two sides.